Political and financial background in board interlocking and earnings management in Brazil

Abstract

Purpose Although board interlocking underlying forces are largely hidden, the purpose of this paper is to provide managers, auditors, analysts, regulators and other stakeholders with sociological board interlocking information considering the different backgrounds of their members. Design/methodology/approach The research sample gathered 1,606 observations from 2010 to 2017. For data analysis, the direct and indirect board interlocking linkages, considering the different backgrounds of board members, established the centrality indicators. Subsequently, the authors used these indicators according to each measured background in the regression models. Findings The results indicate that the political background of board interlocking members is positively related to real earnings management practices, while the financial background has a mitigating effect on such practices. Research limitations/implications The findings suggest that individual skills and interests conveyed across the corporate social network have shaped corporate governance, with distinct impacts on the quality of accounting information. Practical implications The authors conclude that both backgrounds could have implications on agency conflicts, increasing (policy) or reducing (financial) information asymmetry between the company and its various stakeholders, which indicates that the authors must consider sociological and not just economic aspects within corporate governance. Social implications The sociological background of individuals is necessary for the congruence of monitoring mechanisms, and consequently, the quality of accounting information. Originality/value This study examines the influence of the political and financial background of board interlocking members on real earnings management practices in Brazilian publicly traded companies in the International Financial Reporting Standards post-adoption period.

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“…These findings emphasise the negative effect of political involvement on reporting quality . This discovery is substantiated by Magro and Klann (2021), who indicate that politicians serving on the Board of Directors tend to endorse opportunistic accounting practices, leading to information asymmetry and declining accounting information quality.…”

“…Due to their political influence, politically connected boards are more prone to creating conflict between owners and employees. Magro and Klann (2021) said the influence of political affiliations plays a pivotal role in shaping the level of transparency and can potentially amplify corruption, particularly in de veloping economies. There is the potential for politicians to manipulate the information that corporations release to the public.…”

“…These questions draw from the works ofCheung, Evans, and Wright (2010), Tarr and Mack (2013), Jayalakshmy et al (2005), Ullah et al (2021), and Puroila and Mäkelä (2019). Questions 11 to 20 in Section C focus on the topic of "Political interventions" and are based on the works of Najaf and Najaf (2021), Yudhanti and Tjahjadi (2021), andMagro and Klann (2021). Questions 21 to 30 in Section D are about "Economic consequences" and are adapted from the studies ofWu et al (2016),Wardhani (2019), andAhmad et al (2023).…”